IFS: New revenue-sharing with mayors needs careful design to avoid richer areas’ funding quickly pulling ahead

The government has committed to sharing a portion of income tax revenues with England's regional mayors from April 2028. The crucial details of how this revenue assignment plan will be implemented are expected in a fiscal devolution roadmap' alongside this Autumn's Budget. A new IFS report produced as part of the IFS Green Budget 2026 with support from CIPFA and the Nuffield Foundation lays out the key issues, choices and trade-offs the Chancellor faces in the design of the new system.

The government has already said the system will be fiscally neutral' initially new assigned revenues will replace part of the grant funding mayors currently receive from the government such that overall, they don't see an overnight increase or decrease in funding. Tax rates will continue to be set in Westminster. But, over time, areas will gain revenue if their local economies and tax revenues grow and lose if they do not providing a financial incentive to support growth.

Billions of pounds of funding per year for transport, skills and economic development are at stake. Our analysis shows that without careful design, richer areas such as Greater London could see their funding pull significantly ahead of poorer mayoral areas in the North and Midlands, and areas without mayors. Rather than helping narrow regional inequalities, as government intends, this could widen them.

Our report finds that: 

• The government should operate a system of equalisation payments' (to/from mayors) to offset large initial differences between assigned tax revenues and the grant funding being replaced. This could avoid overnight winners and losers. In 202324, income tax revenues per person ranged from an estimated £2,390 (in today's prices) in the Tees Valley to £8,590 in Greater London.

• The decision of how to update the system in future years will be crucial. If equalisation payments are fixed or increased only in line with inflation, they will shrink relative to (growing) assigned tax revenues. As a result, those mayoral areas which start with high tax revenues compared with the grants they forgo would see their revenues after equalisation outpace other parts of the country even if their underlying income tax revenues did not. Under some reasonable scenarios, funding for Greater London in particular could pull ahead to the tune of billions of pounds per year within 10 years even if income tax revenues in the capital grew no faster than anywhere else. The total share of income tax revenues assigned to mayors would also grow over time, leaving less for the government to spend on national services and parts of England that lack regional mayors. 

• To avoid this, there is a strong case to increase equalisation payments each year in line with national growth in income tax revenues. This would maintain the amount of redistribution relative to national revenues, without weakening mayors' financial incentives: they would still gain if their income tax revenues grew faster than the national average and lose if their revenues grew more slowly. Differences in growth between areas could still lead to big differences in funding for different mayors in the long run though this is what rewarding areas for local growth' means. 

• In recent years, income tax revenues per person have grown more than twice as fast in London, Cambridgeshire and Greater Manchester than in the North East and the Tees Valley. This is largely the result of UK government policies which increased the share of income taxes collected from high earners. While patterns of growth could differ in future, the government needs to decide now how willing it is to see differences in local tax performance as a result of government policies or differences in underlying growth actually feeding through into the funding available to mayors. Resetting the system periodically, setting funding floors or charging levies on fast-growing areas could limit divergences in funding, but would also weaken incentives for mayors.

• Choices over these and other aspects of the design of the new system should reflect how important the government thinks financial incentives are relative to some of the other potential benefits of revenue assignment. Allowing mayors to retain more of the increases (or falls) in local tax revenues for longer would give them a bigger financial incentive to enact policies that boost the incomes of local residents. Revenue growth as a result of mayoral investments could help repay debts incurred to pay for the up-front investment costs. But another potential benefit is helping mayors plan for the longer term by giving them greater certainty over funding than they currently get from year-to-year grants. A system that limits both big falls and big rises in revenues would weaken financial incentives somewhat, but provide more certainty over future funding. 

David Phillips, head of devolved and local government finance at the Institute for Fiscal Studies and an author of the report, said:

The design of the new revenue-sharing arrangements for England's regional mayors will be one of the most consequential decisions taken at this year's Budget. While there might be no effects on funding on day one, over time some parts of the country will gain financially and others lose.

That effect is part of the point of the reform: with more skin in the game of economic growth, mayors will be more incentivised and empowered to support growth through local policies and investments. But careful design will be needed to prevent richer areas' funding unfairly pulling ahead. The government must also decide how big a gap in funding it is willing to see between winners and losers in the years ahead.'

Iain Murray, Director of Public Financial Management at CIPFA, said:

Allowing mayoral strategic authorities to retain a share of income tax revenues is a bold change to both the tax and local government funding systems; its significance should not be underestimated. While this change would initially be revenue neutral, mayors should respect the very different nature of this funding source, recognise that in their policy priorities and look to the long term.

Measures that encourage strategic public investment in regional growth are welcome. But both the government and mayors will also need to adapt to new financial risks as well. This means having in place systems and the professionals to run them to identify and manage the financial and strategic risks and opportunities that revenue assignment will bring to England's mayoral authorities.'

Mark Franks, Director of Welfare at the Nuffield Foundation, said:

Regional inequalities in England are already wider than is easy to reconcile with either fairness or economic efficiency. Tax-sharing with England's mayors has the potential to help, but the design of the new funding system will be critical in determining whether reform improves opportunities for people in poorer areas and strengthens the economy as a whole or allows existing gaps to widen further.'

ENDS

Notes to Editors

• There are currently 18 mayoral strategic authorities (MSAs) across England, covering nearly two-thirds of the population. They will receive an estimated £26 billion in funding in total this year, with a majority (£16 billion) coming from central government grants. Grant funding per person for MSAs ranges from £38 per person in Cumbria to £832 per person in Greater London, largely reflecting differences in mayoral responsibilities. For example, the Mayor of London's responsibilities include police and fire services, the public transport network and social housing investment, one of which are devolved to the Cumbria Combined Authority. Appendix A of our report provides details of how we have estimated strategic and local authority funding.
• The government is giving mayors new powers to levy taxes on overnight visitor accommodation (a tourism tax'), but this report focuses on a plan for sharing a portion of the revenues raised from income tax and business rates with MSAs, based on the performance of revenues from their areas a policy termed revenue assignment'. MSAs are set to receive an increased share of business rates revenues from April 2027. 
• The government is still to confirm the share of income tax revenues that will be assigned to MSAs and the grant funding that this will replace, and even whether revenue assignment will begin for every mayor in 2028. This makes any estimates of the potential scale of this policy, or the impact of it on the revenues of particular MSAs, subject to a high degree of uncertainty. To give a sense of scale, seven established MSAs are set to receive funding through integrated settlements in 202829 worth £3.9 billion in today's prices (£169 per person), equivalent to around 3% of estimated income tax revenues collected in these areas. A 10% share of income tax revenues collected in these seven areas could be worth around £14 billion.
• Between 201112 and 202324 (the most recent year of data available), income tax revenues per person increased by an average of 1.4% a year in real terms in Greater Manchester, 2.2% a year in real terms in Cambridgeshire and Peterborough, and 2.5% a year in real terms in Greater London. This compares to 0.6% a year in real terms in Tees Valley.
• The report includes illustrative scenarios for what could happen to mayoral funding if the government chose to replace integrated settlement funding for the seven MSAs that currently receive it with 10% of income tax revenues. In this scenario, all of these MSAs would initially make equalisation payments back to government, but these would be much larger in London (£9.2 billion, or £994 per person) than across the other six areas (£1.1 billion in total, or £78 per person on average). If these equalisation payments were subsequently increased in line with inflation and income tax revenues grew by 2% above inflation in all parts of England, Greater London's post-equalisation revenues would grow by an average of 17% a year above inflation over 10 years. This would mean the Mayor of London would receive around £2 billion more a year in today's prices by year 10 compared with if Greater London's post-equalisation revenues grew at the average for the Northern and Midlands MSAs (2.5% a year above inflation).

New revenue-sharing with mayors needs careful design to avoid richer areas' funding quickly pulling ahead is an IFS report by Martin Brogaard, Kate Ogden and David Phillips.